Kentucky’s economic forecast looks brighter, with some clouds

University of Kentucky construction projects and the jobs associated with them will continue to have a big impact on Lexington’s economy this year. Erin McLaughlin

University of Kentucky construction projects and the jobs associated with them will continue to have a big impact on Lexington’s economy this year. Erin McLaughlin

Kentucky enters a new economic year with a lot of hope and some caution.

There has been a lot of good news lately, and some bad news, that could affect Kentuckians in 2016 as the slow recovery from the Great Recession of 2008 is finally being felt by most people.

Politics may influence the state’s economy in 2016 more than in most years; how is anybody’s guess. Kentucky has a new governor with very different ideas than the previous one, and this is a presidential election year.

There are now about 1.85 million wage and salary jobs in Kentucky, 20,000 more than in 2007, at the peak of the last expansion, according to a new report for the Kentucky Chamber of Commerce by University of Louisville economist Paul Coomes.

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But 56 percent of those jobs are in the Louisville and Lexington areas, and they account for 58 percent of all state wages. The state’s two largest metro areas accounted for 47 percent of Kentucky’s job growth over the past six years.

An October report by PNC Financial Services Group showed the Louisville and Lexington regions exceptionally strong by national measures, led the professional services, education and health care sectors. Manufacturing and the housing industry also showed healthy growth.

One interesting thing to watch this year will be the effects of higher minimum wages in Louisville and Lexington. Unless overturned by a court challenge, they will give badly needed raises to people whose incomes have long been stagnant.

Putting more money into the pockets of low-wage workers helps the overall economy, because they tend to spend more of what they have than wealthy people do. If consumer confidence remains strong, it will be good news for retailers.

By one measure, Kentucky workers earn nearly 18 percent less than the national average. And across the state, the percentage of adults with jobs is lower than the national average. It is dramatically lower in mountain counties, where only 37 percent of adults are employed.

Kentucky created new jobs at a slower pace than border states except for Indiana and Tennessee, which should give pause to politicians who often hold those two states up as models for Kentucky.

Most Kentucky metro areas gained some jobs, but 56 counties, including those in the mountains, have lost jobs. Payrolls in the mountains have fallen 13 percent over the past six years.

Some mountain counties’ plight can be attributed to coal, which has been shedding jobs for three decades. The reality is that cheap natural gas and depleted coal reserves are killing Eastern Kentucky’s coal industry. Large numbers of jobs are never coming back, no matter what path Democrats or Republicans take with environmental regulations this year and beyond.

Manufacturing, long key to the state’s economy, has gained post-recession jobs three-times faster than the national rate, to a total of 241,000. The percentage of U.S. manufacturing jobs in Kentucky has risen to 2 percent from 1.8 percent, but there are still 12,000 fewer manufacturing jobs in the state than there were in 2007.

The poster child this year for Kentucky’s manufacturing rebound could be the new Lexus line at Toyota in Georgetown, which opened in October. Less obvious growth is occurring in aerospace manufacturing. And the bourbon whiskey boom shows no sign of slowing.

Lexington’s health care industry should continue to be an important growth area for the city. Baptist Health just opened a $240 million expansion, and the University of Kentucky hospital complex continues to grow.

Gov. Matt Bevin won election last November in part by opposing outgoing Gov. Steve Beshear’s support for the Affordable Care Act, which provided health insurance for an additional 400,000 Kentuckians, much of it through the expansion of Medicaid for poor people.

Kentucky’s health care needs and costs won’t go away, and how they are paid for under Bevin’s tenure has big economic implications for everything from health care jobs to the disposable incomes of average Kentuckians.

Likewise, if Bevin seeks to shore up the state’s under-funded and mismanaged pension systems by cutting a lot of state jobs and spending, that will ripple through the Kentucky economy in very negative ways.

Lexington has been enjoying something of a building boom, thanks mainly to the University of Kentucky’s $1.9 billion construction frenzy that began in 2011. UK will have at least 10 projects under way this year, including an expanded student center, new and renovated residence halls and new academic science and research buildings. More than $400 million worth of projects are scheduled to be completed this year and next.

Downtown improvements should continue with the opening of 21C Museum Hotel, extension of the Legacy Trail into town, the start of Town Branch Commons and other projects. Suburban growth has slowed from previous rates, but in-town neighborhoods are enjoying popularity and new investment. Home prices and rents continue to rise.

One big uncertainty for downtown is the long-stalled CentrePointe project. The Webb Companies has turned over control to new developers, but they have yet to do anything. The new developers’ plan includes convincing the city to move government offices there, which seems unlikely unless the cost comes down. If the developers are smart, they are looking for big private office tenants.

Lexington can only hope it doesn’t still have a gaping hole and two idle tower cranes dominating the downtown skyline this time next year.

The nation’s economic strength relative to the rest of the world has been bad news for Kentucky farmers. The strong dollar combined with bad weather led to a $500 million decrease in Kentucky farm income last year, which is expected to further drop to $5.8 billion in 2016 from $6 billion in 2015.

One bright spot is the rebounding Thoroughbred horse industry. Keeneland had strong sales last fall, and American Pharoah’s Triple Crown win, the first in 37 years, offers hope that horse breeding and racing may be in for a good 2016.